As many of the world's economies continue to struggle against the long-term impacts of recession, the investment management industry is closely watching a number of key economies where the potential for sovereign debt default and country risk rating downgrade could impact global financial markets. As a result, governments, trade associations and top industry players are increasingly working together to understand the possible consequences and develop a strategic approach to mitigate further crisis. In Vietnam we can see several high profile debt defaults which have changed risk perceptions.

Following the global financial crisis many regulators are introducing an unprecedented amount of new and far reaching regulation. The new rules create a number of complexities for investment managers, ranging from changes to data and systems to distribution, communications and reporting. With World Trade Organization reforms being implemented in Vietnam, the local reform agenda will allow offshore fund managers to establish 100 per cent owned subsidiaries in Vietnam in 2012.

FATCA changes reporting rules

In the US, the Foreign Account Tax Compliance Act (FATCA) was recently signed into law with the intention of flushing out US tax evaders worldwide. FATCA will impact business and operating models, will require decisions about the customer base and the product offering and will mean a highly costly data cleansing exercise for many asset managers.

Meanwhile, the European Union’s initiative in 2009 to reform the alternative investments sector has generated a high degree of uncertainty in the region and beyond. One of these directives (Alternative Investment Fund Managers Directive) seeks a common EU approach to the oversight of managers of alternative investment vehicles, such as hedge funds and private equity funds. And while there is broad agreement that some regulation is required, the draft (at the time of printing) includes a number of contentious proposals such as:

-The application of the same rules to private equity, real estate and hedge fund managers who, many argue, have quite disparate business models and risk profiles.

-The requirement to appoint an EU depositary bank, which is widely seen as a protectionist measure.

-Depositaries would be liable for any losses suffered due to a failure to perform their obligations - a proposal of grave concern to the banks.

-A provision requiring managers from non-EU jurisdictions to wait two years before marketing their funds within the EU via a passport.

In an ongoing effort to cope with losses caused by the financial crisis and refocus on their core business, many banking and insurance groups are continuing to divest of non-core subsidiaries, including investment management arms. Some legislation may also encourage the trend. This has generated an appetite for acquisitions on the part of opportunistic investment managers seeking further expansion. We have seen signs of rationalisation and offshore interest in the Vietnam funds management industry.

The global financial crisis has changed perceptions of risk among governments and industry players

With the banking sector required to reduce its exposure to the securities and real estate sectors, we can anticipate many opportunities for astute fund managers to acquire debt or assets at attractive prices. As financial institutions continue to focus on exiting non-core performing and sub-performing loans, significant opportunities have opened up, particularly for the few strategic buyers with excess liquidity and an appetite for growth. There are signs that price expectations between buyers and sellers in many non-core performing loan markets are starting to align. In part, this has been encouraged by a growing willingness on the part of sellers to consider extending funding lines to the acquirer. This has effectively allowed traditional financial investors to focus on lower quality and difficult to manage assets where the price gap is often less disparate.

With so many changes in the financial landscape, many CEOs have been asking themselves whether they have the optimal business and operating models to achieve their strategic and financial goals. Indeed, some CEOs and their executive teams have taken a step back to re-examine the financial goals defined for the business, the strategy employed to achieve them and the models in place to deliver that strategy.

One area that has rapidly risen to the top of the boardroom agenda is optimising the cost base. In this environment, cost management is one of the few controllable profit drivers and often includes product rationalisation, redesign of the sourcing model and improvements to existing tax structures or a concerted view to minimise tax risks.

Governance and risk

Most investment managers know that - when understood and properly managed - risk can create business opportunities and deliver real value to their business. As a result, we are increasingly seeing senior management become highly engaged in understanding and challenging management information - particularly investment risk reporting - in order to make more informed business and strategic decisions. Investors have also become more inquisitive about corporate governance and risk management procedures conducting extensive financial and tax due diligence before any investments. This has become particularly important for large institutional investors where in response managers are required to review their tax structures and seek tax advice to provide a level of comfort before commitments to investments are made.

Tax obligations on the sale of private equity investments

With the recent changes introduced by Circular 18, the tax reporting obligations for Capital Assignment Tax purposes have shifted from the purchaser to the Vietnamese company. This presents issues for Vietnamese companies in controlling the flow of the sales proceeds through the various trading accounts of the seller, purchaser and also their own accounts. We expect the seller will be required to assist the Vietnamese company with the reporting, withholding and remittance obligations. The sales and purchase agreement should be reviewed to ensure which entity will be responsible for these administrative tasks and can become more complicated when prima facie capital assignment is payable, however, it is exempt under a double tax agreement. We can also expect the Vietnamese company to insist on warranties and indemnifications against any tax risks or further tax payment obligations should the tax authorities challenge the capital assignment tax declaration and increase any tax payable.